Market Insider: Tuesday Look Ahead

Goldman Sachs' before-the-bell earnings, a sprinkling of economic data and the Fed's afternoon rate decision would be the normal hurdles for financial markets Tuesday, but nothing is normal in this market right now or on Wall Street, for that matter.

Anxiety is high going into Tuesday's market day, as markets around the world cascade on Wall Street's turmoil. Traders say the big worry now though is the health of insurer AIG, which was downgraded Monday night by Moody's and S&P, a move that makes its hunt for financing even more desperate.

"The thing is they have a lot of collateral calls coming with the downgrades and this puts pressure on its capital," said Greg Peters, Morgan Stanley credit strategist. Traders have said AIG is of particular concern because its tentacles reach deeply into other financial institutions and markets around the world.

"The federal funds futures market is priced for increased odds of an interest rate cut at tomorrow's FOMC meeting as well as in the months ahead. There is credence, however, to the idea of waiting and letting the financial markets settle down without a rate cut, a strategy that would be consistent with the Fed and the Treasury letting Lehman fail," he noted. Crescenzi also said the Fed may want to hold off cutting rates so it could use as a more impactful tool at a later date.

Monday's more than 500-point decline in the Dow followed a series of weekend news events that will continue to cast ripples through the financial services industry for years to come. Two of the major Wall Street firm disappeared as viable stand alone institutions -- Lehman collapsed in bankruptcy and Merrill Lynch fell into the stronger arms of suitor Bank of America in a $50 billion deal.

Goldman's third-quarter earnings is the news that may help somewhat to set the early tone in what promises to be a very sloppy market open. Goldman is viewed as the strongest of the Wall Street firms, the cream of the street. Yet, its stocks sold off sharply with other financial stocks Monday. Goldman's future and the future of Morgan Stanley as the remaining stand alone Wall Street firms is a big topic of discussion on the street, as is the new alignment of Bank of America which joins Citigroup and JPMorganChase as the newest in a breed of financial supermarkets.

Goldman is expected to earn $1.71 per share, a 71 percent decline, on revenues of $6.231 billion.

"That's the key," said Art Cashin, director of floor operations at UBS of Goldman's earnings. If Goldman disappoints, Cashin said it could be very negative for the market. But if it's good? "How good is good? Does that solve all the other problems?" he said.

Cashin also pointed to an important technical move going into Tuesday's open. As I spoke to him in the final hour of trading Monday, he said he was watching a very tight technical range on the S&P 500 of 1197 to 1200. "If you break that, beyond this land there will be dragons," he said.

Watch out for the dragons. The S&P 500 closed at 1192.70, down 58 points.

Tuesday's economic reports include the consumer price index at 8;30 a.m. and the National Association of Home Builders survey at 1 p.m. Treasury international capital flows data is also reported at 9 a.m. Treasury Secretary Hank Paulson speaks on the economy and housing at 1:30 p.m. in Washington.